ECB Provides a Little Breathing Space, but No More

The European Central Bank kept the pressure on troubled euro zone countries on Thursday, sending a clear signal that while the bank may take further measures to bring sky-high borrowing costs down, struggling countries must act and take responsibility for their finances.

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"First of all governments need to go to the EFSF; the ECB cannot replace governments,” Draghi told reporters at a news conference after the central bank left rates on hold at 0.75 percent.

Troubled member states (related: world's biggest debtor nations) can submit a request for aid from the European Financial Stability Facility (EFSF), Europe’s rescue fund, which can then respond by buying up bonds to drive yields down. But Germany wants to attach strict conditions to such a move.

German officials have also warned the ECB against large-scale bond buying in recent days and Draghi conceded that the German Bundesbank and chief Jens Weidmann had their “reservations” about the bond-buying program.

“The ECB is trying to put the ball firmly back in the court of the politicians. Monetary policy cannot solve this crisis. It can provide breathing space but it cannot solve it, James Ashley, senior economist at RBC Capital Markets told CNBC.

“And the problem with the ECB is that while it continues to provide that breathing space, all it is doing is taking the pressure off the governments, so there’s a fine balance to get here between taking the pressure off and alleviating market conditions and improving the macro outlook, but at the same time keeping the pressure on to try and get the governments to do something,” he said.

Draghi urged governments to push ahead with reforms and fiscal consolidation and said they should take further “decisive and urgent steps” to improve competitiveness.

“I don’t think the ECB is out of options but I think at the moment, it doesn’t want to use those options,” Ashley said.

Draghi raised hopes for decisive ECB action last week when he said the bank would do all it could do preserve the single currency. German Chancellor Angela Merkel and French President Francois Hollande added their voicesto the promise to safeguard the euro.

That message sent stock markets sharply higher as investors speculated that the ECB would re-start bond purchases to bring down borrowing costs for countries such as Italy and Spain.

They currently face interest rates considered unsustainable in the long term.

But some analysts sought to temper the euphoria that followed Draghi’s coments, pointing out that the ECB President had added the caveat that measures needed to fall within the scope of the ECB’s mandate.

Draghi repeated on Thursday that the bank would do whatever was in its power to preserve the euro as a stable currency.

The ECB has already taken on over 200 billion euro of debt from euro zone countries.

Volker Wieland of the House of Finance research center in Frankfort pointed out that it was not the ECB’s job to ease market conditions for certain governments and not for others.

“They can do quantitative easing if there’s a threat of deflation — that’s obviously not the case anywhere at the moment — so they should just stay away from it,” he said.

“The situation right now calls for much more action on the national level. There’s no point in buying time. The key country right now is Italy and Monti is running out of time — the election is coming up,” Wieland said.

According to him, markets will want a greater degree of certainty that reforms will be implemented in countries struggling with high borrowing costs, even if the governments there change.